Transfer Pricing

Question 1

Define “transfer price”.

Answer 1

Amount (price) at which goods or services are transferred between affiliated entities.

Question 2

Identify and describe three major bases for setting transfer prices.

Answer 2

Cost: The transfer price is a function of the cost to the selling unit;
Market Price: The transfer price is based on the price of the good or service in the market (if available);
Negotiated Price: The transfer price is based on a negotiated agreement between buying and selling affiliates

Question 3

For U.S. income tax purposes, in setting transfer prices, the resulting income should be allocated based on what factors?

Answer 3

Functions performed by separate affiliates;

Risks assumed by separate affiliates.

Question 4

What significant outcomes does the setting of transfer prices impact?

Answer 4

Profit recognized by separate units;
Allocation of taxes between units;
Measures of separate unit performance.

Question 5

In addition to minimizing total income taxes, what other savings may be accomplished by the setting of transfer prices?

Answer 5

In addition to income taxes, the setting of transfer prices may affect:
Withholding taxes, that may apply to the transfer of cash as dividends, interest or royalties;
Import duties, which are applied to goods based on transfer prices;
Profit repatriation restrictions, which limit the amounts of profits that can be transferred out of a country.